We Have Learned Nothing

The longer I am in this business, the more convinced I am that we have learned nothing when it comes to the markets. We go too high on the upside and too low on the downside. Boom turns to bust and the cycle keeps repeating itself. Or the old adage, "those who don't know history are doomed to repeat it".

The classic examples are often cited: the South Seas bubble, the tulip craze and of the course the '29 crash. The railway boom. The electronics/laser boom. In more recent history there are countless other examples, the debt boom of the 60s follwed by the painful recession of the 70s. The LBO craze in the 80s that died with the RJR Nabisco deal and the 87 crash. (And the early 90s recession that followed that was probably more severe as a result). The dot com boom of 99-00 and the ensuing bust during the 02-03 recession. We can now add the subprime meltdown of '07 and the Great Recession of '08. The list goes on.

So why don't we learn? Because "it's different this time" (the most dangerous words in investing, according to John Templeton.) In other words, there are an infinite number of variables that keep changing to produce different situations. But the end result is the same. Prices become inflated, before crashing. The problem everyone faces is the same: trying to pick the top. There were signs in '05 and '06 of a debt meltdown, but it didn't manifest until '07. Similarly, during the Dot-com all the signs of overvaluation were there but the markets kept moving higher. "Close your eyes and buy" became the industry mantra, as people talked of a "new paradigm" that was changing equity valuations forever. Investors built castles in the sky only see new castles built bigger and higher. When the tide turns though the stampede for the exits crushes nearly everyone. Being a porfolio manager who wasn't long commodities in '06 or tech stocks in '99 was a painful experience. (one that might have gotten you fired.) You have to play the game. At the same time, few people were able to resist the urge to sell in the Fall of '08, perhaps because they were newly unemployed or feared not having cash on hand to make mortgage payments if they became unemployed.

As George Soros said, the "job of the markets is to fool people". Thus the cycle continues.